A month ago, I researched credit from the perspective of a potential home buyer. The results are on my website on the Owning a Home page, under the topic Your Credit. I believe that I found some good sites for analyzing your credit, and I indicated to these sites that they could send me information on services. Yesterday in an e-mail, I saw the term peer to peer lending. Looking into this topic, I wanted to see how it wold be involved with home ownership.
First a little background should be given on this subject. Immigrant communities in the United States have long used some means of loaning money to their friends. After my wife came to this land, she used a method typical of many groups. Her group of friends each agreed to put an amount into a pot, say $25 each. They worked out the order in which people would get the money. Each month, one person walked away with the pot, and this would go around till each person took the pot, and then start over again. It was a way for one person to have extra spending money that month. Another means used by German immigrant farmers in Texas was by forming an association. The association served two purposes: 1)people came together to share knowledge once a month (studies have shown that the German farmers in Texas became the most productive group in the state through this shared education program); and 2) to create an emergency fund for members in need. Through monthly contributions or a yearly due, money was raised, and a committee would decide on how it was distributed.
The modern version uses the internet with a firm like Prosper.com being a facilitator. A lender can bid on giving money to a borrower for a certain interest rate. Many times the lenders are connected into groups which bid on a certain borrower, thereby spreading the risk. Although there were many news reports about how these firms could help with buying a home or helping those facing foreclosure, this could not happen with any of the internet sites that I visited. Loans were at most for $25,000 on Prosper.com’s site, and all of the sites seemed to have a time table of three years to pay back the loan. For those facing foreclosure, the sites stressed that they were looking for borrowers with good credit. Mortgages generally run for 30 years, and no site seemed to be prepared for a large loan over the $25,000 amount. Some people were trying to borrow money for a down payment on a home, and this was a close to assisting home buyers that these sites came. In many cases, the borrowers did not seem to obtain the full amount of their desired loan. I did not find data on people obtaining full loan amounts to those receiving a percentage, but that would be an interesting comparison. These sites may well be worth a try for people looking into having extra money during closing. The rates did not always seem that much better than banks, and there may be advantages of obtaining a loan through a bank. I present this information to you for your own research.
I would like to make one observation. The method used by immigrants could be modified to help you. What if you and a group of friends formed an association, where you met once a month to share your findings on topics ranging from cost saving tips, debt cancellation, and buying a home. The money that you pool together each month could be placed in an investment program like the one offered by Sharebuilder.com. Each month for a $12 fee, your pooled money would go into stocks. Once needed you could sell the stocks. Pick a basic plan for what you would invest in. For example, a stock that tracks the S&P 500, and then the Lehman Brothers aggregate bond fund (AGG), or you could focus on dividend paying blue chips. Pick something which is relatively safe. One drawback to this plan is capital gains taxes. Another drawback could be frequent selling of stocks. Just pick a basic plan, and then stick with it for some time. Also obtain the advice of an accountant. A visit to an account could cost between $100 to $200, but this is well worth it for your protection. As for the group, the members could come from an existing group. I frequent both a Catholic Church (my wife’s) and a Lutheran Church (my own), which have a singles group. People from this group could come together in such a plan. Maybe the pot method could be used by such an association, or some other variation.
The internet will continue to find ways to change business, and the peer to peer method could be truly innovative in many ways, but these firms have not gone to their full potential yet. It would be wise to remember, that a bank is a peer to peer institution. Our savings deposits are used for loans to others. Microlending has made such a big impact in the world, that maybe internet peer to peer could make such an impact. This is just a though to ponder.